Economics - the potential causes of price changes in oil?

Question

What are the potential causes of the price changes in oil over the last 30 years? Also, what are the potential impacts of increasing oil prices on the world economy?

Answer 1

Around 30 years ago there was the oil shock. Most oil, at that time, was produced around the Arabian region, and most of these countries formed OPEC, a cartel. They decided that they wanted more money for what was their lifeblood and announced quotas for every member below current production. This reduced demand and caused sharp price increases.

On the other hand, as prices rose, it started making sense drilling elsewhere. With improvements in technology, oil platforms could be built. With the high prices extra wells were used, such as the North Sea Oil. This caused prices to fall as the new producers were not part of OPEC and thus not subject to quotas. Price fell due to incrased supply.

There were also wars: Iran-Iraq, Kuwait... These created uncertainty, an this more people wanted to buy oil to stock up. At the same time, as resources were diverted to war, as certain regions became risky, oil production also fell (although OPEC did mitigate the price ise bu increasing quotas). Hence war and uncertainty it brings caused prices to rise.

Nowadays we have a new phenomenon. WHat is the reason for the price increase? Prior to the invasion of Iraq, Iraq had the food-for-oil programme which reduced the amount of oil Iraq could sell belo it's previous volume. Just before and during the war, it's normal for prices to go up as supply falls, and speculative/stock demand rises. But once the war ended, and burning fields closed down, why are prices sky rocketting.

While India and China are fuelling demand, this is not enough.

It's pure speculation that's taking place, just like in the housing market in many partsof the world. People buy today thinking they can sell for higher prices tomorrow.

What do increasing oil prices do? Simply increase the price ofalmost everything. Most equipment needs oil or byproducts. As the price of these rise, so will the prices of the final products. Hence there should be some inflation, and possibly recessions.

The question we should be asking is, what happens when the speculative bubble bursts?

Answer 2

The causes are, basically: increase in demand (specially in the last years, with the great economic growth in India and China), the oil producers smaller capacity to increase production (because oil is a finite resource), and the fact that many oil reserves are in countries like Nigeria, Iraq, etc, were production is often disrupted because of terrorism and war. Sometimes there are also disruptions in oil supply when oil producers are hit by storms (remember that storm in the Mexico Golf?).
The impacts are: higher costs of production in every industry that uses energy derived from oil, so expect high inflaction in the coming years. Countries will have their growth limited by the high price of oil, and eventual lack of it to fulfill all the needs. Eventually countries will have to find other sources of energy.

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Answer 5

Price is not simply affected by supply and demand of a product in the equilibrium market, but it can be affected by alternative products and technology as competition.

The world has increased production of oil since the lowest level in 1982 and faster than oil discovery rate at peak level in 1965 to meet the global demand of oil.

China went flat in oil production since early 80s and is importing 40% oil and is expected to grow 7.5% per year while India increases 5.5%. By next 30 years, oil demand will be at least double for global population growth.

World C&C production continues to retain its May 2005 peak and is forecast to decline by 1%/yr until 2009. The decline rate steepens to 4%/yr until 2012, and conitues its trend to empty in 2100.

US peak oil discovery is 1965, peak production is 1972 and continue to decline.

Alternative energy likes coal, natural gas, ethanol, castor oil, water-hydrogen may impact on the supply side, or the saving-energy technology like recovery of oil, lubricate oil, fuel injector and electric cars can also lower the demand side.

Natural gas and ethanol production increases to its peak to 2012 and may continue.

Recovery technology for heavy oil can improve from the current 2% to 20% or maximum level at 80%, and China plans to implement new technology to replace imports of oil.

Mexico, Australia, deserts of Africa and Asia can supply castor oil for diesel engines several times more than the world needs.

Technology change in gasoline automobiles can also improve its efficiency.

Although pessimetic forecast of oild supply is peak at 2005 and empty around 2100 and the demand side is steady increasing, the oil price increase can be offseted partially by alternative fuels of natural gas, ethanol, castor oil, coal, water hydrogen on the supply side and the new technology of oil recovery, non-gasoline transportation and others on the demand side. The prediction of oil price rise means increase in consumption of alternative resources and technology.

http://www.theoildrum.com/node/2716
http://home.earthlink.net/~oilandyou/
http://www.castoroil.in/uses/fuel/castor_oil_fuel.html

Answer 6

high demand and scarcity of oil .